Wednesday, July 16, 2008

Wall Street Socialism (or Robin Hood in Reverse)

There are 191 days until Jan. 20, 2009.

Wall Street Socialism (or Robin Hood in Reverse)

By Robert L. Borosage

Huffington Post - Posted July 15, 2008 - 05:19 PM (EST)

This weekend, Treasury Secretary Henry Paulson, former

head of the Goldman Sachs investment house, provided us

with a perfect demonstration of Wall Street socialism.

He announced that the Bush administration would seek

congressional approval to bail out Fanny Mae and Freddy

Mac, the government created, but privately owned,

profit-making housing finance companies that hold or

guarantee nearly half of the US mortgage market -- some

$5 trillion in debt. Paulson seeks and will get an

unlimited line of credit to guarantee their debt, as

well as authority to purchase their shares to

supplement their capital base. The Federal Reserve

announced it was ready to provide lending while waiting

for Congress to act. Paulson said the new subsidies

were designed to sustain the two institutions in "their current form."

Perfect. The two institutions have always been more

foul than fish. Created by the government in the 1930s

to help lubricate the US mortgage market by buying

mortgages from the banks so they would have the cash to

make more mortgages, Fanny and Freddy were able to

borrow money at a discount because of a widely shared

assumption that the government would stand behind their

debts if push came to shove. Their operations were

regulated, limited by laws detailing what mortgages

they could assume (They were essentially prohibited

from diving directly into the subprime muck). But as

they grew and profited, their executives pocketed

lavish salaries and bonuses -- giving them an incentive

to grow even more (and as we discovered earlier this

decade, to cook the books). Last year, for example, the

Chair of Freddie Mac took home a cool $18,289,575.

Fannie Mae CEO Daniel Mudd reaped a 7 percent rise in

pay to $13.4 million in 2007 while the company lost

$2/1 billion and its shared fell 33%. Nice work if you can get it.

Now with the bursting of the housing bubble, push

surely has come to shove. Foreclosures are soaring, the

two institutions have sustained billions in losses,

their shares have plummeted, and, according to former

St. Louis Federal Reserve President William Poole, one

and possibly both would be bankrupt if their assets

were marked down to their current market value.

So now the Bush administration proposes to make the

federal guarantee explicit and even to offer taxpayer

money to help recapitalize the two banks if needed.

Everything has been nationalized -- except the profits

and the pay scales of the bank's executives.

That's right. If the guarantees work, private

speculators, having driven the stock down, will clean

up on the upside. And the bank's CEO's will continue to

pocket the multi-million dollar salaries that are de

rigueur on Wall Street. Call it Wall Street socialism.

Their losses are socialized; their profits are

pocketed. You and I will pay for their failures. And if

conservatives have their way, their families will

pocket their successes, without even having to pay a

tax for the transfer of the estates we've helped to create.

These enterprises are operating on our tab now --

completely. Why not just nationalize them, as even that

font of economic convention, Sabastian Mallaby

suggested yesterday in the Washington Post. Sure, we'd

have to add the $5 trillion in debt to the federal

balance sheet, but we could add the assets also. And

after Paulson's announcement, global investors are

already toting up their debts onto the federal balance sheet.

Why pay dividends to shareholders when they are

essentially playing with our money? Why pay managers of

public enterprises the bloated pay packages of Wall

Street speculators? Why allow them to finance lobbyists

to shield them from accountability? The fiction of

their separate existence has been exploded; let's save

the dough and run them efficiently.

Fannie Mae and Freddy Mac are only the most recent and

extreme version of Wall Street socialism. The Bush

administration has done essentially the same for

private providers of college loans. The Federal Reserve

has made taxpayers the guarantor not simply of the

banks that it regulates, but the shadow banking system

of hedge funds and investment houses that it doesn't

regulate. After the bailout of Bear Sterns, they

basically are gambling with our money. The Federal

Reserve has now traded more than $500 billion in

federal bonds for the toxic paper of private banks and

investment houses, some $200 billion of it in mortgage

backed securities, worth dimes on the dollar. This

massive subsidy -- justified as necessary to keep the

banking system afloat -- is not accompanied by limits

on what gambles the speculators can make, how much debt

they can take on, what rewards they can pocket. They

are playing with house money -- not exactly an incentive for prudence.

Republicans seem ideologically committed to these kinds

of arrangements. In Medicare for example, conservatives

have demanded that the government subsidize private

insurance companies to compete with public Medicare,

even though Medicare provides healthcare much less

expensively. When Bush and the DeLay Congress drove

through the prescription drug bill, they included a

provision that PROHIBITS Medicare from negotiating

cheaper prices for drugs, effectively turning the bill

from a benefit to Seniors to a multi-billion subsidy to

private drug companies (not surprisingly, after Wall

Street, the drug companies finance one of the most

lavish and powerful lobbies in Washington ).

Now it makes sense to me for the government to

subsidize housing mortgages and college loans.

Encouraging home ownership and higher education are

central to sustaining the broad middle class that is

America's triumph. But I can't imagine why we need to

let bankers and investors pocket the upside, when they

are playing with our money and we're covering their

losses. Public enterprise may be staid and

bureaucratic, but it's a lot cheaper and more efficient

than the perils of Wall Street socialism.

[Robert L. Borosage is the president of the Institute

for America 's Future and co-director of its sister

organization, the Campaign for America 's Future. The

organizations were launched by 100 prominent Americans

to challenge the rightward drift in US politics, and to

develop the policies, message and issue campaigns to

help forge an enduring majority for progressive change

in America . Most recently, Borosage spearheaded the

Campaign's 2002 issues book, StraightTalk 2002,

providing activists and candidates with distilled

messages on kitchen table concerns, from jobs to

affordable health care. Borosage also helped to found

and chairs the Progressive Majority Political Action

Committee, developing a national base of small donors

and skilled activists. Progressive Majority recruits,

staffs, and funds progressive candidates for political office.

Mr. Borosage writes widely on political, economic and

national security issues for a range of publications

including the Washington Post, the Los Angeles Times,

and the Philadelphia Inquirer. He is a contributing

editor at The Nation magazine.]

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